An increase in sublease space could be on the way in North Texas
By Ryan Salchert – Staff Writer, Dallas Business Journal May 13, 2020
Tenants typically choose to sublease space for a number of reasons, including cost cutting, changes in space requirements and consolidations.
“We have two large subleases in our portfolio. One is from Tenet Healthcare when they decided to consolidate, leaving behind a few different office spaces,” said Kathy Permenter, co-managing partner at Younger Partners.
Both cost cutting and space requirements will continue to influence subleases as shelter-in-place ends. While few local experts have seen an increase in subleases so far, some believe they’re coming.
Impacts on tenants and landlords
“We call it shadow space because it’s not direct space. When you have more sublease space out in the market, it tends to drive rates down a little,” said Bumpas.
The creditworthiness of a tenant looking to sublease their space, known as the sublandlord, can also have a major impact.
“If it’s a creditworthy tenant, you may not get a renewal, but it’s less pressing. The tenant is on the hook. If it’s a less creditworthy tenant, it could become a very large issue. With a bankruptcy, it’s even more difficult for landlords and subtenants,” said Grant Pruitt, president and managing director of Whitebox Real Estate.
If a tenant that is offering its space for sublease goes bankrupt, it not only puts pressure on the landlord, but can also leave the subtenant hung out to dry. Pruitt saw this first hand when working with a client that wanted to sublease space from a large oil and gas company. When the oil and gas company went bankrupt, the sublease was rejected and the subtenant eventually got kicked out of the space.
“They ended up bringing in security, locking the doors and basically kicking them out onto the curb. We eventually got them into another sublease, but they were pretty hesitant,” Pruitt said. “It’s a totally different risk profile. I’m not saying it’s a bad idea. I’ve represented tons of subleases. It’s just important to know that there are risks on both sides.”
Like other experts, Pruitt believes subleases will increase in the near future – as much as 52.4 percent over the next 60 days – according to preliminary projections he shared with the Dallas Business Journal. While other experts agree that an increase is likely, few are sure of the magnitude. The theme of uncertainty also permeates as companies come back to the office.
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